Introduction to ADU Investments in La Mesa

Why are ADUs popular in California?

ADUs, often called granny flats or in-law suites, have become popular in California as a way to help with the housing shortage. With home prices going up and new houses being built less often, ADUs give homeowners the chance to add extra living space to their property without buying more land. These extra spaces can be rented out at an affordable price, provide additional income, and offer flexible living options for young professionals, families, and seniors, all while allowing people to stay close to their families and community.

How can an ADU increase property value?

Adding an ADU can make a property more valuable by creating extra space that can be rented or used for various purposes. Properties with ADUs are more attractive to buyers because they offer different possibilities, such as rental income, living space for multiple generations, or even a home office. In California’s competitive housing market, having extra space and flexibility makes these properties stand out and increases their value.

Is it possible to sell an ADU in La Mesa?

In California, AB 1033 allows local authorities to set rules for selling an ADU and the main house separately as condominiums, as long as ADU regulations are followed. In La Mesa, selling an ADU is possible under certain conditions. The ADU should be built by a qualified nonprofit organization, there should be a recorded agreement between co-owners, or the city should approve selling the ADU and the main house as separate condominiums.

The ROI for building an ADU in La Mesa

We analyzed multiple projects, and we determined that on average you should expect a 55% ROI for an ADU project in La Mesa. This ROI doesn't include the acquisition cost for the property. This ROI value is good but at the lower end. When you expect this ROI, it'd be good to pair it with personal interests that you want to achieve, like the benefit of hosting friends and family. As a benchmark, a good investment for us is when the ROI is min. 50%+.

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Case study: 900 sq. ft. ADU built in La Mesa

Scenario 1: Build to sell

ADU Building Area

The project involves constructing an ADU with a total area of 900 square feet. This ADU is large enough for a 2 bedroom, 1 bath unit. This scenario assumes that you already own this property and there is an existing primary residential unit on site.

Total Project Cost

Based on the industry reports, the construction cost per square foot is $325, resulting in total hard costs of $292,500. Soft costs encompass various expenses incurred during the planning, design, and permitting stages of the project. These include fees for professional services such as land surveying, structural engineering, architectural design, soil engineering, and permit fees. In this case, the soft costs amount to $39,654 covering essential aspects of the project's development and approval process.

The total project cost, including hard and soft costs, is $332,154. This estimate reflects the overall investment required to complete the construction project and obtain the necessary approvals.

Total Added Market Value

The sale price per square foot for a residential house in La Mesa is estimated at $573. This represents the anticipated value of the completed building per unit area in the current real estate market.

Multiplying the market value per square foot by the building area yields the total added market value. In this case, the completed project is expected to add $515,700 to the property.

ROI (Return on Investment)

The ROI provides insight into the project's profitability by comparing the total added market value to the total project cost. In this analysis, the potential gross Profit without considering acquisition or financing costs amounts to $183,545 or 55% ROI. At this level of return, the investment in an ADU to sell it offers a modest return relative to the total project cost and the market value. In addition to the modest return, you’ll have to consider the short capital gain tax, in case you want to sell it before 2 year's end.

Scenario 2: Build to rent

Potential Rental Income of an ADU

Constructing a 900-square-foot ADU in La Mesa comes with a total cost of $332,154. Financing with a 6.5% interest rate loan results in a monthly payment of $2,099 or $25,188/year. Ideally, renting out the main house could cover this payment, while the ADU serves as a source of additional income. Renting out a 2 bedroom, 1 bath ADU long-term could generate approximately $33,600 per year. At this rental income, which gives you a $8,000 possible profit per year, you probably look at paying off the loan by simply renting the ADU.

City rules state that rentals should be for at least 30 days, so short-term stays are not allowed. While renting through sites like Airbnb can bring in extra money during busy times, long-term rentals offer more stable and dependable income. With long-term rentals, you won’t need to keep searching for new tenants, cleaning between stays, or re-advertising the property, leading to steady earnings and less maintenance.

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Is there financial assistance for building ADUs?

Yes, California provides financial support through the CalHFA ADU Grant Program, which began on September 20, 2021. Homeowners who qualify can receive up to $40,000 to cover expenses like permits, design, surveys, soil testing, and impact fees. The goal of this program is to make building ADUs more affordable and help increase the supply of housing.

Building Your Team for the ADU Project

Once you've secured funding, ensure that your property meets all the necessary ADU requirements, such as size limits. Decide what you want to use the ADU for, whether it's for renting or another purpose, and hire professionals like architects and contractors to handle the work. It's a good idea to choose contractors familiar with local building rules, which you can find by looking at similar projects nearby.

What are some other financing options for building an ADU?

Home Equity Line of Credit (HELOC)
A HELOC lets you borrow money using your home’s value, similar to a credit card. You can take out the money as needed, giving you flexibility to cover the costs of building your ADU.

Home Equity Loan
With this option, you receive a lump sum based on your home's value. You repay it with fixed monthly payments, making it a straightforward way to finance your ADU.

Cash-Out Refinance
This involves refinancing your existing mortgage for a higher amount, and then using the extra cash for your ADU. It allows you to get the needed funds without taking out another loan.

Renovation Loans
These loans are specifically for home improvements, including building an ADU. They can help with the construction expenses.

Private Loans
Some private lenders offer loans for ADU construction, which can be customized to fit your project’s needs.

Potential Challenges and Solutions

Can an HOA prevent the construction of an ADU?

No, California law protects homeowners from homeowners’ associations (HOAs) trying to stop or overly restrict the construction of ADUs in single-family neighborhoods. If an HOA attempts to block your ADU, their rules will not apply, and they may face penalties.

Maximizing Profitability in La Mesa

Marketing Strategies to Increase ADU Investment Returns

To make the most of your ADU investment, consider these marketing strategies:

Research Local Rental Prices
Look into what other ADUs in your area are renting for to set a competitive price. Online tools can help you track local demand and pricing trends.

Partner with Real Estate Agents
Work with real estate agents in your area to find tenants or investors. Provide them with marketing materials to help attract the right audience.

Use Social Media
Promote your ADU on platforms like Facebook and Instagram to showcase its benefits and connect with potential renters or buyers. This can help build trust and boost interest.

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Resources

La Mesa Municipal Code